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Edited Transcript of GASS earnings conference call or presentation 22-Aug-19 2:00pm GMT

Q2 2019 StealthGas Inc Earnings Call

Kifisia Sep 9, 2019 (Thomson StreetEvents) -- Edited Transcript of StealthGas Inc earnings conference call or presentation Thursday, August 22, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Fenia Sakellaris

StealthGas Inc. - Finance Officer

* Harry N. Vafias

StealthGas Inc. - President, CEO, CFO & Non-Independent Director

* Michael Gordon Jolliffe

StealthGas Inc. - Chairman of the Board

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Conference Call Participants

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* Nicholas Linnane

Sefton Place Advisors Ltd - Portfolio Manager

* Randall Giveans

Jefferies LLC, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's StealthGas Second Quarter 2019 Financial and Operational Results Conference Call. (Operator Instructions) I must advise you that this conference is being recorded today, Thursday, 22nd of August, 2019.

I would now like to hand the conference over to your speaker today, Mr. Michael Jolliffe. Please go ahead, sir.

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Michael Gordon Jolliffe, StealthGas Inc. - Chairman of the Board [2]

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Thank you. Well, good morning, everyone, and welcome to our second quarter 2019 earnings conference call and webcast. I'm Michael Jolliffe, the Board Chairman of StealthGas, and joining me on the call is our CEO, Harry Vafias; and our Finance Officer, Fenia Sakellaris, who will later on discuss our financial performance.

Before we commence our presentation, I would like to remind you that we will be discussing forward-looking statements, which reflect current views with respect to future events and financial performance. At this stage, if you could all take a moment to read our disclaimer on Slide 2 of the presentation. Risks are further disclosed in StealthGas filing with the Securities and Exchange Commission. I would also like to point out that all amounts quoted, unless otherwise clarified, are implicitly stated in U.S. dollars.

Slide 3 summarizes the key highlights of the second quarter of the year that we released today. Indeed, this second quarter was not what we anticipated, especially giving our promising performance in the first quarter of '19. Unfortunately, this quarter was not the typical seasonal factors but rather the continued worry about the U.S.-China trade war that deprived us from better results. We faced a very soft Asian market, mostly affecting the trade of petchems. In spite of our satisfactory operational utilization in excess of 95% and lack of time chartering opportunities in the East undermining direct revenue, thus resulting in close to breakeven results.

Regardless of the difficult market we faced, we managed to increase our period coverage to close to 80% for the remainder of the year, but most importantly, we continued our growth and expansion strategy. We concluded 2 deals with which we entered into 2 new LPG subsegments. Firstly, we acquired from a third party a new 11,000 cbm pressurized vessel with delivery in 2021 from a Japanese shipyard, our largest pressurized ship to-date, and a few days ago, we took delivery of a secondhand 38,000 cubic meter fully-refrigerated ship. The latter one is acquired with our joint venture partner.

Looking briefly at our financial performance highlights. Our voyage revenues came in at $34.1 million, decreased by $9.3 million compared to the same period of last year due to the net reduction of our own fleet by 10 vessels. Our adjusted EBITDA at $14.9 million was lower than expected due to softer spot revenues.

Looking at our financial structure, we continued to deleverage at a strong pace. Our debt to assets now stands below 40%, and we still maintain a strong cash position of almost $66 million. Last but not least, based on our stock repurchase program, we have purchased to-date 170,914 of our company's shares for an aggregate consideration of about USD 600,000.

Slide #4. This provides an analysis of our fleet employment. In terms of charter types, out of a fleet of 44 operating vessels, excluding our joint venture vessels, we have 11 of these on bareboat, 25 on time charters and 8 in the spot market. Compared to our previous quarter, we have one of our product tankers, the Clean Thrasher coming off bareboat and now operating under a time charter contract. During the past 3 months and in spite of a tough Asian market, we concluded 6 new charters and charter extensions all at improved rates. Our contracted revenue is now in the order of $115 million.

In Slide 5, I would like to provide a brief summary of our recent strategies with regard to our S&P activity and our joint venture. As mentioned at the beginning of our call, StealthGas took the bold decision of expanding further in new areas of LPG through 2 new acquisitions. Through our joint venture scheme a few days ago, we took delivery of the Eco Nebula, a 2007-built, 38,000 cubic meter, fully-refrigerated LPG ship. This vessel is already fixed on a 6-month time charter. Further to this, StealthGas agreed to the acquisition of an 11,000 cubic meter LPG pressurized vessel from third party to be delivered in 2021 from a Japanese shipyard.

With these deals, our company further strengthens its presence across the LPG-size spectrum. We felt the timing was right to diversify our revenue stream, whilst remaining in the LPG segment, in which we have gained significant expertise across the years. It is with no doubt that the smaller LPG pressurized market will always remain our core activity, but we felt we should expand our activity especially now that the broader LPG transportation market looks so promising.

With regards to our recent established joint venture scheme with our recent acquisition, we now count 5 vessels. 4 out of the 5 of these vessels are currently on time charter contracts, thus providing us with a steady cash flow.

In terms of our fleet geography presented in Slide 6, our company focuses on regional trade and local distribution of gas. This graph is a snapshot of the positioning of our LPG vessels as of August 12, 2019. Currently 45% of our LPG fleet trades in Europe, about 35% in the Middle to Far East, 10% in Africa, 6% in America and 4% in Australia.

In the second quarter of 2019 and compared to our previous quarter, we further strengthened our presence in Africa and Australia. I will now turn the call over to Fenia Sakellaris for our financial performance. Thank you.

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Fenia Sakellaris, StealthGas Inc. - Finance Officer [3]

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Thank you, Mr. Jolliffe, and good morning to everyone. I will continue the presentation focusing on our financial performance for the second quarter of '19. As mentioned throughout our call, adverse sentiment around the U.S.-China trade war still affects the Asian market, therefore revenue generated in the second quarter of the year was less than expected. Spot market in the east was soft and as charters were reluctant in fixing new charters, we operated spot on average 6 vessels in the east.

Let us move on to Slide 7, where we see the income statement for the second quarter of '19 against the same period of the previous year. Voyage revenues came at $34.1 million, marking a $9.3 million decrease compared to the same period of last year. This reduction in revenue was expected following our strategic decision taken in 2018 to divest mostly all the LPG vessels that led to the net reduction of our average owned fleet by 10 vessels. Setting aside the fleet deduction, what we noticed this quarter is a rise of our average daily revenues coming from time charter and a rather large reduction of our average daily revenues stemming from the spot market.

Voyage costs amounted to $4.1 million, making a $0.2 million decrease comparing to Q2 '18. This decrease in voyage expenses is attributed to a 5.1% quarter-on-quarter reduction of spot days in absolute number. We need to note, however, that as a percentage of calendar days in Q2 '19, our presence in the spot market was higher compared to the same period of last year and was close to 20%.

Net revenues that is revenues after deducting voyage costs came at about $30 million. Running cost at $11.8 million marked about 21% decrease compared to Q2 '18. This decrease in cost was mostly due to our strategic fleet reduction by 10 operating vessels and the receipt of an insurance claim which reduced our operating costs days. This quarter, though, we had one of our product tankers coming off bareboat with high initial cost that positively added to our OpEx on a daily basis.

Based on all of these, our EBITDA is in the order of $14.5 million, interest and finance costs marked close to a $650,000 decrease, mainly attributed to the lowering of our debt and several loan margin reductions we managed to agree during the past months. Based on all the points analyzed above, we ended the second quarter of the year with an adjusted net income of about $200,000 corresponding to an earnings adjusted EPS of $0.01.

Slide 8 demonstrates our performance indicator for the period examined. As mentioned earlier on, our operational utilization for Q2 '19 was in the order of 95.3%, a lower-than-expected figure due to higher-than-anticipated presence in the spot market. In terms of our adjusted time charter equivalent, we noticed a $250 daily reduction on a quarter-on-quarter basis, while on a 6 months basis, we noticed an increase reflecting the increased levels of prevailing period rates. Total expenses adjusted on a 6 months basis marked a low 0.5% -- 0.7% year-on-year increase.

Looking at our balance sheet on Slide 9. Our strong liquidity continues as our unrestricted cash base is around $66 million in spite of our recent capital expansion. Our gearing is less than 40%. In terms of net debt ratio, we stand at about 33%, a very healthy ratio. During the first 6 months of '19 debt repayments amounted to $49 million. This amount includes our scheduled principal repayments and voluntary repayment of $60 million loan related to our JV vessel and a loan refinancing of around $12 million. Our current debt is in the order of $390 million. We have no balloon payments for the remainder of '19, and we have agreed to refinance all balloon payments that were due in 2020.

Slide 10 presents on a daily basis, the evolution of our breakeven against our average time charter equivalent. What we noticed this quarter is an obvious decrease of our average time charter equivalent, particularly compared to the first quarter of '19.

Indeed compared to the first quarter of '19, our daily time charter revenues were around $350 higher in the second quarter of '19 while our daily spot revenue was significantly lower by about $1,500.

I will now hand you over to our CEO, Mr. Harry Vafias, who will discuss market and company outlook.

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Harry N. Vafias, StealthGas Inc. - President, CEO, CFO & Non-Independent Director [4]

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Let us proceed now with Slide 11. Global LPG trade looks promising, as going forward trading volumes are expected to increase. In the second quarter of '19, however, we witnessed a slowdown in the Asian market, particularly in the trade of petrochemicals, and the main reason behind this was that the spot market was hit by the continued uncertainty around the U.S.-China trade war. As long as Chinese receivers are holding back from buying petchem products, the product prices has been negatively affected and arbitrage opportunities for traders become fewer and more difficult to utilize.

In essence, the U.S.-China trade war has altered the trade partners in Asia, and although a segment of shortfall trade have been unaffected the opposite happened due to the adverse market sentiment that negatively impacts trading decisions. Regardless of the difficult quarter facing Asia, the broader LPG market shows a rather optimistic future. China will further expand its PDH capacity, both for the remainder of '19 and 2020. In addition the market continues to wait for the start-up of the PETRONAS and Saudi Aramco rapid project in Malaysia, which will have significant volumes of petchems for export.

Finally, looking at the North African region, new LPG products are expected to add around 1.5 million tons of capacity over the next 5 years, showing new opportunities continuously open up for us.

On Slide 12. We see that during Q2 '19, rates for small LPGs remained flat with the exception of the 3,500 cubic meter pressurized ships in the east, where we witnessed close to $200 per day reduction. Looking at Europe, the second quarter of '19 was quite balanced. The only point of concern in terms of the European market is the possibility of ships being relocated from the east, an event that might cap any further rises in rates.

As mentioned, trading activities in the east were depressed. In order to sustain trade flow and reduce idle time, owners in the east had to operate more in the spot market on lower-than-expected freights. In this environment, charters had no difficulty finding spot vessels to cover their needs, and with time charter level significantly above spot levels, the choice of going short on shipping was easy for most of the key charters in the area. For this reason, we saw very little new time charter business being concluded and some time charter vessels were redelivered by their respective charters.

With regards to scrapping, the small LPG pressure segment has substantially old tonnage, 26% of the fleets is above 20 years of age. This together with the new environmental regulations may trigger an acceleration of recycling in the upcoming years. Since the beginning of this year, we have recorded a demolition of one small pressured ship. As per published orders, there were 12 vessels that is 3.4% of the total fleet to be delivered until the end of 2021, probably the smallest order book of any ship category. The small gas carrier fleet has approximately 90 vessels above 20 years of age, therefore the current order book of those ships is not large enough to offset the older tonnage expected to be recycled in the period ahead, especially when water ballast must be fitted and we have the new IMO 2020 emission laws coming into force in about 4 months.

On Slide 13. We discussed our company's outlook commencing with our share performance for the past 8 months. The performance of our stock is presented along with selected gas carriers peer group and the price of oil. Since the beginning of the year, our share price has marked about a 30% increase. Our positive first quarter results announced in May in conjunction with the active stock repurchase program assisted our share price increase witnessed up until the end of July.

Since the end of July, we had 3 events. The concern around the fed interest rate cuts and the escalation of the U.S.-China trade war that negatively affected energy-related stocks. In terms of correlation with oil prices, we see that old stocks presented still follow a broad correlation with oil price movement.

In Slide 14, we show different scenarios for the company's performance for next year. The different scenarios were created based on our existing fixed charters plus vessels open on the spot market assuming no new charters upon the expiration of a fixed vessel. Revenues were calculated using an estimated spot rate based on current levels and an individual utilization rate for each vessel. Compared to the previous forecast, we remain conservative as per the LPG spot rate, added our newly agreed time charters that did not account for the JV contribution to the EBITDA. Our JV income only affects our bottom line. As evident, a $2,000 increase in daily spot rates will boost our EBITDA by about $20 million.

In Slide 15, we show some valuation multiples of StealthGas against comparable companies. As evident, our company trades at a greater discount than its peers in terms of NAV. Our market cap is currently close to $133 million, creating a large discrepancy between the value of our assets, which are currently a shade below $1 billion. In essence, investors are valuing us at about $65 million above our cash balance or in other words as much as one of our 22,000 semi-refrigerated ships. We are confident that the market will correct its view on our company and that will soon reach a stage that our market cap will be a realistic reflection of our assets value and growth potential.

Concluding the presentation with 16, we present a brief summary of our companies and market's strong points placing emphasis on the fact that we operate in a segment with solid fundamentals. We believe that market conditions, particularly in the east will surely improve, thus aligning us to enjoy higher earnings and profitability levels.

At this stage, our Chairman, Mr. Jolliffe, will summarize our concluding remarks for the period examined.

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Michael Gordon Jolliffe, StealthGas Inc. - Chairman of the Board [5]

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Thank you, Harry. Due to market uncertainty resulting from the U.S.-China trade war, the pressurized market in Asia presented a relatively tough second quarter for ship owners. Charter is in the region. We're reluctant to conclude or renew period contracts, thus forcing vessels to operate in the spot market at low rates. This is the main reason that our revenue generation was less than expected in spite of favorable operational utilization of close to 95% and an increase in daily revenue from our vessels on time chartered contracts.

This quarter we had close to 1/5th of our fleet operating in the spot market, the majority of which were in the Asian region. Our vessels operating in the spot market during the second quarter of '19 generated in total almost $1.5 million less time charter equivalent revenue than in the first quarter of the year.

From a strategic standpoint, we have been active, with StealthGas moving to enter for the first time the 11,000 cubic meter pressurized LPG segment. In addition through our joint venture arrangement, we move to enter in a second new LPG subsegment as we recently acquired a 38,000 cubic meter fully refrigerated vessel. Relying on the technical and management expertise gained as leaders in this small LPG market, StealthGas is further expanding its presence in the broader LPG space, thus enhancing and diversifying its revenue stream.

Another important move is that we have actively commenced our stock repurchase program having bought more than 170,000 shares to-date supporting our stock and thereby our investors. We believe that the Asian market will soon correct itself. Our company has a very strong balance sheet and diversified fleet, a free cash base that exceeds $65 million and a debt-to-asset ratio of less than 40%. Therefore, we feel optimistic for the future as market conditions improve.

We have now reached the end of our presentation, and we would like to open the floor for your questions. So operator, please open the floor. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question is coming from the line of Randy Giveans from Jefferies.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [2]

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So a few questions for me. First, looks like utilization fell to about 95.3%, a little below our expectation of 96%. So now that we're more than halfway through the third quarter, where do you expect utilization to be this quarter? And then do you expect further kind of seasonal improvement in 4Q '19?

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Harry N. Vafias, StealthGas Inc. - President, CEO, CFO & Non-Independent Director [3]

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If you tell me what Trump will do, I will be very glad to answer the question.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [4]

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Okay. Well, how is the first half of 3Q then?

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Harry N. Vafias, StealthGas Inc. - President, CEO, CFO & Non-Independent Director [5]

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Yes. I think that for Q3, we would estimate same to be on the conservative side, and obviously, we're optimistic for Q4. But as I said, we would expect that these trade wars and sanctions on different countries that are big in LPG would have been eliminated by now. This hasn't happened. So yes, we feel Q3 would be the same as Q2, and we are confident for a better Q4.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [6]

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Perfect. Okay. And then looking at the 2 vessels recently purchased by the joint venture, what was the reason for entering kind of 2 new asset classes as opposed to growing in the 3,500 to 7,000 cubic meter asset classes you already operate in.

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Harry N. Vafias, StealthGas Inc. - President, CEO, CFO & Non-Independent Director [7]

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Yes. Just to correct you, Randy, one ship was bought by the JV, the other one was bought by StealthGas on its own.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [8]

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Okay. Sorry about that. So 2 new asset classes, right, 38,000 (inaudible)?

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Harry N. Vafias, StealthGas Inc. - President, CEO, CFO & Non-Independent Director [9]

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Yes. It's quite simple. It's quite simple, on the 11,000, I think it's a no-brainer. When you are the leader of the pressurized market and you have ships all across the spectrum, you cannot not have the latest version of the pressurized ship. We see a tendency for charters when they can to use larger ships for economy -- economies of scale reasons. We find -- we found a great asset at a good price from an excellent yard. As you know Japan is the best for this kind of ships, and we decided to buy it. And in any case, it won't be with us. Soon it will come in about 18 months. That's the reason for that.

For the larger ship, the 38,000, because as you know, these ships suffered a lot the last 2 years, the prices were depressed and so now it was -- we think an opportunity to buy a cheap quality asset with great upside potential, because again, as you know, the bigger the ship, the bigger the upside potential. On top of that, we're sharing the risk because we're buying it 50-50 with our partner, and therefore, the equity contribution and risk from StealthGas aside isn't that big.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [10]

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Okay. I guess that's a good segue here. So it seems like your preference for uses of cash is second-hand acquisitions, either on your own accord or with the joint venture. With that, how did you decide on the $600,000 repurchases during the quarter? And should we expect a greater degree of repurchases in the third quarter, fourth quarter as earnings improve?

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Harry N. Vafias, StealthGas Inc. - President, CEO, CFO & Non-Independent Director [11]

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We didn't decide on this, Randy. As you know, we are limited in how many shares we can buy every day. We are also limited by the closed periods as again you know. The shared volume, as I'm sure you know, is not that huge. So it's not a decision, it's how much we were able basically to buy.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [12]

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Okay. You could always use a tender block. There are some other opportunities. But...

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Harry N. Vafias, StealthGas Inc. - President, CEO, CFO & Non-Independent Director [13]

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Yes. Yes. But with the normal -- sorry, with the normal day-to-day buying, this is where we go to. The Board has decided to continue the buying since we're trading at such a big discount to NAV.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [14]

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That's fair. All right, last question for me. You mentioned the 6 recently completed time charters were at higher rates. Can you quantify this? Is this 5%, 10%, 30% higher? And then, specifically, what's the new rate for the Clean Thrasher, the products tanker?

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Harry N. Vafias, StealthGas Inc. - President, CEO, CFO & Non-Independent Director [15]

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We haven't announced that, Randy, so as you can understand, we cannot say those things. As I said, this is very encouraging that the -- in a quarter where the spot market was relatively weak and weaker than expected, we were able to secure 6 new contracts at improved rates. As you can understand, without giving numbers, those ships anyway don't fluctuate that much. So even if you get a 5% or 10% increase is quite a significant increase.

On the tanker, again, as I'm sure you are following other companies, the product tanker period rates have been relatively steady over the last 1 year. This has been a very big jump on period rates on crude tankers, but not the same on product tankers. So we didn't get a bad rate but we didn't get an out-of-the-world rate. The interesting thing is that our single crude carrier is coming open in the end of Q1, beginning of Q2. So there, hopefully, we will be able to take advantage of the new quite strong period rates and secure some nice income on that ship.

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Operator [16]

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(Operator Instructions) Your next question is coming from the line of Nick Linnane from Sefton.

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Nicholas Linnane, Sefton Place Advisors Ltd - Portfolio Manager [17]

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What level of demand do you think the rapid refinery will create when it comes online? Kind of, roughly how many ships do you think it will kind of require to serve and what type of ships?

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Harry N. Vafias, StealthGas Inc. - President, CEO, CFO & Non-Independent Director [18]

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That's a quite difficult answer -- difficult question, especially when this is quite far off. It would be quite risky of myself trying to quantify a number of ships. I mean the market, it has quite a big development and quite a big change in LPG exports, but giving number of ships that early I think would be a bit unprofessional from my side.

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Nicholas Linnane, Sefton Place Advisors Ltd - Portfolio Manager [19]

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Okay. Do you -- just in terms of how these things generally work, would you expect that to create demand for your pressurized ships? Or for semi-refs? Or both?

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Harry N. Vafias, StealthGas Inc. - President, CEO, CFO & Non-Independent Director [20]

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Good question, Nick. As you know well, for us, it doesn't really matter if the demand is direct or indirect. As you know well, in a lot of terminals that we do not go, the product is carried intercontinentally by the big ships and then we are needed at the last leg of the transportation, where we go to major hubs, take parcels of these big cargoes that were carried by the big ships, and then transport them locally into smaller ports where the big ships cannot go.

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Operator [21]

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We have no further questions at this time. (Operator Instructions) There are no further questions at this time. Speakers, please continue.

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Harry N. Vafias, StealthGas Inc. - President, CEO, CFO & Non-Independent Director [22]

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We would like to thank you for joining us at our conference call today and for your interest and trust in our company, and we look forward to having you with us again at our next call for our third quarter results in November. Thank you very much.

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Operator [23]

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And that concludes our conference for today. Thank you for participating. You may all disconnect.